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56 next week. 72T or Roth conversion?
Old 08-28-2017, 01:34 PM   #1
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56 next week. 72T or Roth conversion?

Have a Trad IRA with a little over $500k in it. Retired 4 years ago this month.
Do not plan on needing this money for a very long time. If at all.
But, would like to stay in the 15%-married tax bracket for the next 30-40 years. I know Roth conversions are what most folks gravitate towards.
But what about taking $24k annually (72t) from the IRA for 30 years?
(Doable with a safe 3% return) Starting now 7 1/2 years prior to SS 62? (Yes, am taking it at 62)
Would not be spending it (or much of it) Just getting it into a usable / inheritable account is the goal with as little tax hit as possible.

Just been thinking about again & wanted some ideas.
Just not seeing the big tax advantage to do Roth conversions this late in the game. Shed some light on me.....
Thanks!
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Old 08-28-2017, 01:53 PM   #2
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I see that there are multiple benefits to doing Roth conversions.
1. You can convert to the exact top of your tax bracket, and recharacterize any overage
2. You can convert much more than the top of the 15% tax bracket in separate asset classes, recharacterize the losers and only pay taxes on the winner. (roth horse race)
3. I'm sorry to tell you that one of you will die, and all of a sudden your tax brackets have changed, even though your expenses probably won't drop as much.
4. The inherited roth will be tax free for your heirs, whereas the t-IRA won't, and your heirs might still be working, pushing them into a higher tax bracket.
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Old 08-28-2017, 02:05 PM   #3
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But what about taking $24k annually (72t) from the IRA for 30 years?
...
Would not be spending it (or much of it) Just getting it into a usable / inheritable account is the goal with as little tax hit as possible.
Not sure why you think you need to do 30 years.

You only need to do a 72t for a minimum of 5 years or until age 59.5, whichever is longer. In your case, you would need to do a 72t for 5 years. After you complete your 5 years of 72t you can just take ordinary withdrawals from your IRA and there will be no 10% penalty.

You may want to consider splitting your IRA into two - one from which you do your 72t withdrawals and one for regular withdrawals. That way you could make a penalty-free withdrawal from the latter one at (for example) age 60 if you needed it without disrupting your 72t program. Just make the size of the 72t IRA large enough and invest it safely enough to where you won't run out of money in the account. Once you're done with the 72t in 5 years, you could recombine that IRA with the other one.
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Old 08-28-2017, 02:21 PM   #4
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"Not sure why you think you need to do 30 years."
Just calculated my IRA balance with a low CD rate of return.
And it came out to 30 years. Keeping the annual withdrawal rate relatively low.
Should have started Roth conversions yrs ago. As this was a pretty good year for me.
Might not be able to do a conversion till next year and stay in the 15% bracket.
1st world problems.......
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Old 08-28-2017, 02:26 PM   #5
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You may know this, but if you are married filing jointly and use the standard deduction, in 2017 you can have up to $96,700 of income and still be in the 15% tax bracket. If you itemize deductions, the amount is higher by the amount itemozed deductions over the $12,700 standard deduction.

The first $20,800 is not taxed since it is offset by deductions and exemptions (more if you itemize). The next $18,650 is taxed at 10% and the remainder at 15%.

One interesting nuance is that qualified dividends and long-term capital gains have their own 0% tax rate if you are in the 15% tax bracket or lower.

So for example, let's say that you have a $20,000 pension and $30,000 of qualified dividends and long-term capital gains and you itemize and have $18,000 of emized deductions. You could convert $52,000. Your total income would be $102,000 and your taxable income would be $75,900 ($102,000 less $18,000 in deductions and $8,100 in exemptions).

However, since the $30,000 of qualified income is not taxed, your "ordinary" income is $45,900... the first $18,650 is taxed at 10% and the remaining $27,250 is taxed at 15%... so your total tax is $5,953... 11.4% of the Roth conversion. Given that when you deferred that income you probably avoided paying 28% or more and that you might be in the 25% bracket or higher once you start SS, to pay 11.4% now is a deal.

YMMV and you'll have to analyze it using your particulars, but I think Roth conversions between ER and SS are a great money saving opportunity that I am taking full advantage of
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Old 08-28-2017, 05:14 PM   #6
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You may want to consider splitting your IRA into two - one from which you do your 72t withdrawals and one for regular withdrawals. That way you could make a penalty-free withdrawal from the latter one at (for example) age 60 if you needed it without disrupting your 72t program. Just make the size of the 72t IRA large enough and invest it safely enough to where you won't run out of money in the account. Once you're done with the 72t in 5 years, you could recombine that IRA with the other one.
The 72t program does limit the amount you can withdraw from your IRA, if the OP wants to withdraw $24K/year using 72t he will need close to the full $500K in the IRA account.

If it was me I would start out doing ROTH conversions and then at 59.5 you could re-evaluate where you want to go. The 72t is a good choice if you need the money for current expenses but it needs to setup carefully, it's unforgiving if mistakes are made.
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Old 08-28-2017, 05:43 PM   #7
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Also, have 2 other Roth IRA's that have had nothing added in 5 years. So it's available if needed. Looks like conversions are still the way to go. Will be able to do some this year & hopefully more over the next few years.

There are limits on 72t's though. Here is a quick & dirty..... showing the max. But you can go lower..
http://www.dinkytown.net/java/Retire72T.html
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Old 08-28-2017, 05:58 PM   #8
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The only advantage I can see for not going with the Roth conversion is the 5 year rule to access the money, but since you've had a Roth open for over 5 years you're beyond that. NgineER laid out the Roth advantages. They are all very valid and not insignificant. I see nothing at all for the other side. I think it's a slam dunk to do the Roth conversions over a 72t.
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Old 08-29-2017, 10:01 AM   #9
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YMMV and you'll have to analyze it using your particulars, but I think Roth conversions between ER and SS are a great money saving opportunity that I am taking full advantage of
The other factor is ACA subsidies by not doing conversions (to keep income low), of which the current $11k a year I get is nothing to sneeze at. And that number is only going to go up over time. So another option if you go this route is to take out Roth contributions tax-free, which don't count against MAGI.
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Old 09-05-2017, 10:23 PM   #10
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As it turns out I can only convert 20k this year and stay in the 15% bracket.
My advice to others is start converting as early as you can.
I was worried I might need to 72t the IRA to make ends meet retiring at 51 & 11/12's. (Was a big step for me retiring that early) Semi worry wart..Just me am sure.
So I held off. Turns out my fears were unfounded. The last 4 years were a breeze.
Anyway, just wanted to wrap this up.
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Old 09-06-2017, 07:35 AM   #11
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Well, 6 years at $20k a year would be $120k and almost a quarter of your current tIRA... better than nothing.
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Old 09-06-2017, 07:59 AM   #12
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Yep, and can change things around a bit over the next 6 years. Should be able to convert about 1/2 by 62. If I choose to.......
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